Is 'Not Guilty' the Same as 'Innocent'? Evidence from SEC Financial Fraud Investigations
56 Pages Posted: 19 Jun 2019 Last revised: 3 Aug 2020
Date Written: June 12, 2019
When the Securities and Exchange Commission (SEC) investigates firms for financial fraud, investors only learn about the investigation if managers disclose it, or regulators sanction the firm. We investigate the effects of such disclosures using confidential records on all investigations, regardless of outcome. Even when no charges are brought, firms that voluntarily disclose an investigation underperform non-disclosing firms by 11.7% over the following year. Disclosure is associated with a higher chance of shareholder class action lawsuits, and more prominent disclosures are associated with worse returns. CEOs who disclose an investigation are 14% more likely to experience turnover. Our results are consistent with transparency about bad news being punished by financial and labor markets.
Keywords: Fraud, Disclosure, SEC, Reputation, CEO Turnover
JEL Classification: G14, G34, G38, K22, K42
Suggested Citation: Suggested Citation